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Time variation in U.S. wage dynamics

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  • Hofmann, Boris
  • Straub, Roland
  • Peersman, Gert

Abstract

This paper explores time variation in the dynamic effects of technology shocks on U.S. output, prices, interest rates as well as real and nominal wages. The results indicate considerable time variation in U.S. wage dynamics that can be linked to the monetary policy regime. Before and after the "Great Inflation", nominal wages moved in the same direction as the (required) adjustment of real wages, and in the opposite direction of the price response. During the "Great Inflation", technology shocks in contrast triggered wage-price spirals, moving nominal wages and prices in the same direction at longer horizons, thus counteracting the required adjustment of real wages, amplifying the ultimate repercussions on prices and hence increasing inflation volatility. Using a standard DSGE model, we show that these stylized facts, in particular the estimated magnitudes, can only be explained by assuming a high degree of wage indexation in conjunction with a weak reaction of monetary policy to inflation during the "Great Inflation", and low indexation together with aggressive inflation stabilization of monetary policy before and after this period. This means that the monetary policy regime is not only captured by the parameters of the monetary policy rule, but importantly also by the degree of wage indexation and resultant second round effects in the labor market. Accordingly, the degree of wage indexation is not structural in the sense of Lucas (1976). JEL Classification: C32, E24, E31, E42, E52

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Paper provided by European Central Bank in its series Working Paper Series with number 1230.

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Date of creation: Jul 2010
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Handle: RePEc:ecb:ecbwps:20101230

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Keywords: Great Inflation; second-round effects; Technology shocks;

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Cited by:
  1. Berg, Tim Oliver, 2011. "Technology news and the U.S. economy: Time variation and structural changes," MPRA Paper 35361, University Library of Munich, Germany.
  2. Messina, Julian & Sanz-de-Galdeano, Anna, 2011. "Wage rigidity and disinflation in emerging countries," Policy Research Working Paper Series 5863, The World Bank.
  3. Lieven Baele & Geert Bekaert & Seonghoon Cho & Koen Inghelbrecht & Antonio Moreno, 2011. "Macroeconomic Regimes," NBER Working Papers 17090, National Bureau of Economic Research, Inc.
  4. Champagne, Julien & Kurmann, André, 2013. "The great increase in relative wage volatility in the United States," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 166-183.
  5. Joris de Wind & Luca Gambetti, 2014. "Reduced-rank time-varying vector autoregressions," CPB Discussion Paper 270, CPB Netherlands Bureau for Economic Policy Analysis.
  6. Tillmann, Peter & Wolters, Maik Hendrik, 2012. "The changing dynamics of US inflation persistence: A quantile regression approach," IMFS Working Paper Series 60, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  7. Julio Carrillo & Gert Peersman & Joris Wauters, 2014. "Endogenous Wage Indexation and Aggregate Shocks," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/881, Ghent University, Faculty of Economics and Business Administration.

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